Mission Statement:
To help restore the proper relationship between our officials in Washington and the citizens of our nation, between bearing our own burdens and bearing one another’s burdens, among competing interests, and to promote the ideal of “doing all that is necessary to achieve and cherish a just and lasting peace among ourselves and with all nations.”

Monday, April 2, 2012

How to Raise Living Standards by Lowering the GDP

(This is part 1 of a 4-part series on how we can—and should—do what conventional wisdom tells us is impossible. Each of us can—and should—enjoy a higher standard of living while drastically reducing the negative impact we have on the environment. In achieving these seemingly contradictory goals, we can achieve two other seemingly contradictory objectives: We can spend fewer dollars on greater benefits and enjoy better health.)

One of the most dangerous myths in the field of economics is that the Gross Domestic Product (GDP) measures prosperity. We’ve always been told—incorrectly—that the GDP measures the total value of goods and services in a given economy during a given period. In fact, it does nothing of the kind. The GDP measures how many dollars are spent on goods and services in a given economy during a given period of time.

The assumption is that money, as measured by the number of dollars, is the same thing as value. Following this assumption, the number of dollars we spend supposedly tells economists how well off we are. To put it another way, the more we spend, even if we have to borrow it, the better off we are.

Common sense tells us that we benefit more from thrift than from profligacy. Economic measures, however, aren’t based on common sense; they’re based on economic models. As any computer programmer will tell you, “Garbage in; garbage out.”

According to economic theory, practices that are beneficial to the individual can be harmful to society as a whole. Thrift, we are told, is an example of this theory. Thrift, according to believers in GDP dogma, retards job creation and messes up employment figures.

I may address the question of job figures in another article, though not in this series. Let's just say for now that the idea that economists commonly use circular arguments to support their preconceived notions. Any of their arguments stemming from the GDP superstition is based on circular reasoning and a tendency to confuse dollars with value. Let’s get back to the main point of this article: dollars spent versus value received.

Let’s suppose that, in the town of Smallville, the Kent family spent $150 on packets of heritage seeds for various foodstuffs, plus a few fruit trees. The Kent family then starts a garden and waits the customary three years for the trees to begin bearing fruit. Next door, the Luthor family does nothing of the kind. They spend thousands of dollars on frozen TV dinners, other processed foods, canned foods, a microwave oven, and, of course, Pepto-Bismol, Ex-Lax, and other over-the-counter medicines for their digestive systems.

It doesn’t take much imagination to see that one of these two families is spending more dollars, but the other family is receiving more value. (Please note that I used the term dollars rather than money. Money is supposed to be a storehouse of value, but most countries have central banks issuing fiat dollars, which are not based on anything of value.)

Let’s carry this point into how our tax dollars are spent. Politicians are often judged by how successful they are in steering “government” dollars into their legislative or congressional districts. They’re seldom judged by what happens to the money.

Suppose a district on one side of a river managed to get more federal dollars for police protection, other security measures, and a larger hospital trauma unit. The congressman from the district on the other side of the river, on the other hand, was unable to get these funds because his district has a very low crime rate. All other things being equal, it shouldn’t be hard to tell which district is enjoying a higher quality of living. Charleston, South Carolina, is an example of how government dollars spent is not necessarily a measure of value received. Several decades ago, Charleston had a high crime rate (I haven’t been able to locate the figures). When Reuben Greenberg became police chief in 1982, the police department spent less money on cars and more on shoe leather, roller skates, and bicycles. Other spending priorities changed, underscoring the point that spending doesn’t necessarily equal value. Charleston soon enjoyed the lowest crime rate of any city of comparable size in the United States. Charleston’s criminal court judges became as lonely as the Maytag repairman.

The war in Iraq is an excellent example of the disconnection between money spent and value received. It may well be the first war in American history in which a nation was bombed, rebuilt, and bombed again in a self-perpetuating cycle.

You can probably think of many other examples showing the folly of the notion that it’s our patriotic duty to borrow and spend our way to the poorhouse. The formula, "Rich America, poor Americans," just doesn't cut it.